Abstract
Understanding COVID-19 induced mortality risk is significant for life insurers to better analyze their financial sustainability after the outbreak of COVID-19. To capture the mortality effect caused by COVID-19 among all ages, this study proposes a temporary adverse mortality jump model to describe the dynamics of mortality in a post-COVID-19 pandemic world based on the weekly death numbers from 2015 to 2021 in the United States. As a comparative study, the Lee-Carter model is used as the base case to represent the dynamics of mortality without COVID-19. Then we compare the force of mortality, the survival probability and the liability of a life insurer by considering COVID-19 and those without COVID-19. We show that a life insurer's financial sustainability will deteriorate because of the higher mortality rates than expected in the wake of COVID-19. Our results remain unchanged when we also consider the effect of interest rate risk by adopting the Vasicek and CIR models.
Highlights
The COVID-19 pandemic has posed a significant challenge to the operation of the insurance industry around the world
Our results suggest that the liability of the life insurer in 2020 is higher than that in 2021, which provides further support to the hypothesis that COVID-19 had posed more adverse effect on mortality rates and the financial sustainability of a life insurer in 2020 than that in 2021
We define a stochastic mortality model with a temporary mortality jump process to capture the effect of COVID-19 on the mortality rates among people at different ages
Summary
The COVID-19 pandemic has posed a significant challenge to the operation of the insurance industry around the world. Due to COVID-19, life insurers in Australia suffered a net loss of $1.8 billion for the year ending March 2020, compared with a profit of $759 million in the previous year [1]. AM Best changed its outlook for the U.S life insurance industry from stable to negative [3]. One factor behind these changes in the life sector’s outlook is: the possibility of higher mortality rates than anticipated. To address this crucial and timely issue caused by COVID-19, it is significant for life insurers to adopt an appropriate mortality model by including COVID-19 mortality risk to analyze their financial sustainability
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